A Short-Term Export Forecasting Model Using Input-Output Tables

Korea's export performance has exhibited a remarkable downturn since the end of 2014, declining over the 12 months of 2015 by about eight percent in nominal terms. Conjecturing this to reflect depreciation of the Japanese Yen and, during the second half of 2015, of the Chinese Yuan coupled with a sudden decline in China's import demand, we apply an Armington (1969)-type trade model to match international trade data with input-output tables in order to identify the sources of export variation in Korea and, as a bridge between the theoretical model and empirical input-output table, to analyze the effect of income (GDP) and exchange rate variation. The major findings of the present study are three-fold. First, the estimated long-run elasticity (0.067) of trading partners' GDP on Korea's export is a lot smaller than the static short-run elasticity (0.755) of their GDP in nominal terms and the estimate of static short-run elasticity (0.462) of GDP in real terms. Second, we find that Korean Won's real depreciation helps boost Korea's real exports in the short-run but its effect turns out to have a slightly negative effect in the long-run which implies that the positive effect of real depreciation of the Won may not last long. Third, we also find that a depreciation of Japanese Yen and Chinese Yuan in nominal terms has negative effects on Korean exports in the short-run, but the Japanese Yen's real depreciation facilitates increases in Korea's real exports consistently in both the short-run and long-run. The effects of the exchange rate variation cannot be unidirectional in both short-run and longrun because the variation affects the relative competitiveness of imported intermediate goods. According to our findings, Korean exports, given a positive income shock in trading partner countries, tend to be replaced by foreign alternatives which reflects a tightening of technology as well as price competition in the global market, and suggests as an optimal export promotion strategy for Korea the pursuit of technological progress and a diversification policy that encompasses both destination and export products.